THE ITO, SABARKANTHA WARD-3, SABARKANTHA vs. THE SABARKANTHA DIST. PURCHASE & SALES UNION LTD.,, SABARKANTHA

आदेश / O R D E R

PER SHRI MAHAVIR PRASAD, JUDICIAL MEMBER :

This is an appeal by the department against the order of the Commissioner of Income Tax(Appeals)-2,Ahmedabad, dated 29/12/2014 for the Assessment Year (AY) 2011-12, on the following Grounds:

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 2 - i. The Ld.CIT(A) has erred in law and on facts in partly allowing the appeal of the assessee by allowing the deduction claimed u/s.80P(2) of the I.T. Act, in violation of provisions of Rule 46A(3)(1) of the I.T. Rule by not allowing a reasonable opportunity to AO to examine or rebuttal of the documents submitted by assessee to the CIT(A). ii. The Ld.CIT(A) has erred in law and on facts in partly allowing the appeal of the assessee by allowing the deduction claimed by assessee (a) u/s. 80P(2)(e)for amount of Rs.22,79,433/- from Godown Rent (b) u/s.80P(2)(d) for amount of Rs.14,72,486/- from Dividend & Interest (c) u/s.80P(2)(a)(iv) for amount of Rs.4,80,591/- from Agriculture Commission income though the assessee does not fall within the ambit of Co- operative Society and on perusal of the annual report it was noticed that the assessee had indulged in various trading activities and was a profit making organization. iii. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer. 2. The relevant facts as culled out from the materials on record are as under:- The relevant extracts from the assessment order are reproduced under:- “4. On going through the Annual report, it is seen that the co-op. society is engaged many activities, brief of each activity is given as under: (i) Electric Section : In this section, ceiling fan, table fan of Crompton Greaves, Bajaj tube-light, lamp, all the items related to lightning, motors for irrigation and flour factory, mixture, iron, Electric and gas geezers, all light fittings related to Anchor

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 3 - and Welcon Co. furniture, fuse, changeover switch etc is sold here. (ii) Cloth Section : The assessee is engaged in the sale of suiting and shirting of Siyaram. Also suiting, shirting, ready-made pants, Shirt, T-Shift of different mills is sold. Pillow covers, sheets, sofa tapestry, curtains, carpet shawl, blankets, sweaters, muffler-cap socks, umbrella, rain-coat etc is sold in cloth department. (iii) Provision section : All types of provision items such as grains, pulses, oil, sugar jiggery, dry fruit, garam masala, tea, toothpaste, brush, soap, chocolate, talcum power, biscuits, hair oil, Eveready torch and power and many other items related to house-hold are sold in this section. (iv) Pesticides Section: In this department all types of seeds i.e.cotton, castor, wheat, maize, groundnut, bajri, rice, tuvar, mug, udad dal etc purchase from Gujarat Rajya Bij Nigam, GUJCOMASOL, Krubhko Co are sold in this section. (v) Retail fertilizer: All types of organic fertilizer and hybrid seeds are sold. All types of basmati rice, dal, pulses, groundnut oil, soyabin oil sugar is sold here. (vi) Machinery section: In this section, galvanized sheets of Jindal, PVC pipes, garden pipe, drums to store grains, Spray pumps of Aspi Co. PVC tanks of Sintex and Kant Company, furniture, table, chair. Also cement of well-known companies is sold in this section. (vii) Iron section: All tools and equipments related to farming are sold in this section. (viii) Amul Parlor : In this parlor all the products of Amul such as milk, ghee, buttermilk, ice cream, curd, cheese, paneer, chocolate etc is sold. (ix) Kerosene section : The assessee is holding agency for kerosene. Besides, Petrol, diesel and oil of IOC company is sold in Mahavirnagar, Ganbhoi, Dhansura, Bhiloda, Malpur, Hansalpur. (x) Books section :. The assess© is whole-sale suppliers of books of Gujarat State in S.K.District. Books of Std 1 to 12, books related to P.T.C are sold here.

The assessee society has claimed deduction under section 80P in respect of income derived by it from the above activities carried out by it. The assessee is a co-operative society deriving income on sale of various items as mentioned above. The products marketed by the society

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 4 - is not grown or manufactured by the members, the items marketed are obtained from outside and sold in the entire district of Sabarkantha. It has also shown income from Godown Rent, Tanker Rent, Pulse Mill Rent, Vehicle hire income, over riding petrol pump and has sold petrol, diesel and oil of IOC Ltd during the year.

In the instant case, the assessee had indulged in trading activities and therefore the assessee is a profit-making organization. The activities carried out by the assessee does not fall within the ambit of co- operative society. 4.1 Accordingly a letter was issued to the assessee on 06/01/2014 to show-cause as to why the claim of deduction u/s.80P of the I.T. Act 1961 should not be disallowed and added the total income. The relevant portion of the show-cause notice is reproduced as under: “Please refer to the above.

In response, the assessee furnished a letter dated 06/01/2014 which is inter-alia reproduced as under: With reference to above we beg to state as under: 1. We have received the show cause notice [SCN] dated 06/01/2014 stating that the activities carried out by Co. op. society does not fall within the ambit of co-op society and therefore why the deduction of Rs.36,15,975/-claimed under section 80P be not disallowed. In this connection, it may please noted that the assessee is district apex co.op society and is carrying on the activities for the benefit of its members. The attention is drawn to reply to Q. No.8(a) of the Tax audit report in form No.3CD-part-B which has stated the activities carried on by the society. For the purpose of easy reference the same is reproduced as under:

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 5 - "Purpose and sale of agricultural implements, seeds, fertilizers and pesticides for members etc. and trading and proceeding in agricultural and non agricultural items for members and others." 2. It may please be noted that the annual report you are referring is 63rd annual report and the assessee is getting deduction under section 80P right from its inception i.e. since 62 years. 3. It appears that the notes given below to the statement of income furnished during assessment proceedings are not looked at. As per the computation of income it is clearly stated that the assessee is eligible for deduction under section 80P to the extent of Rs. 44,62,957/- and that the claim is made to the extent of income available i.e. Rs.39,15,9757-. 4. The break-up of the eligible deduction under section 80P is given in the notes. The same is reproduced below for ready reference: Basic deduction under section 80P(2)(c) Rs. 50,000/- Godown rent under section 80P(2)(e) Rs.24,59,880/- Dividend&Interest under section 80P(2)(d) Rs.14,72,486/- Agriculture commission income U/s 80P(2)(iv) Rs. 7,55,591/- Less: Estimated expenses Rs. 2,75,000/- Rs.4,80,591/-

From the above, it may please be seen that the assessee has claimed deduction under section 80P(2)(C), 80P(2)(e), 80P(2)(d) And 80P(2)(iv) which is allowable as per statute and therefore the question of disallowance does not arise. It may please further be noted that the income or loss from all activities other than refer to in eligible deduction are offered for taxation. However, as a result of deduction there is a loss and there is no taxable income. The impression that the assesses society does not offered income for taxation from its activities is erroneous. Therefore the question of disallowance as proposed does not arise. It is again reiterated that such deduction is granted to the assessee society right from its inception i.e. since more than 62 years.

You are therefore requested to allow the claim and drop the show cause notice."

4.3 The reply of the assessee is duly considered but is not acceptable. It is seen from the annual report that the assessee is neither a Primary Agricultural Credit Society (PACS) nor Primary co- operative Agricultural and Rural Development Bank (PCARDB) - It is

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 6 - noted from records that range of assessee's activities is not confined to one taluka but is extended to entire Sabarkantha district and, thus, in view of Explanation to section 80P(4), assessee is not PCARDB - Further primary object as well as activities of assessee is not confined to agricultural purposes but other purposes also. In view of explanation to section 80P assessee is not Primary Co-operative Agricultural and Rural Development bank. Further, primary object as well as activities of assessee is not confined to agricultural purpose but other purposes also, and hence, assessee cannot be regarded as PACS. Section 80P, inter alia, provides for a deduction from the total income of the co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc. After insertion of sub-section (4) of section 80-P, by Finance Act, 2006, with effect from 1-4-2007, this deduction is available only to-

A society fulfilling two conditions is a PCARDB as per Explanation to section 80P(4) (a) Area of operation confirmed to a taluka (b) The principal object of which is to provided for long term credit for agricultural and rural development activities.

Primary object of principal business of P.ACS is to finance for agricultural purposes or purposes connected with agricultural activities. The primary object as well as activities of assessee are not confined to agricultural purposes but other purposes also. Hence, assessee is neither PACS nor PCARDB hence, no exemption is available to the assessee under section 80P. Since the activities carried out by the assessee does not fall 6. within the ambit of co-operative society and on perusal of annual report it is noticed that the assessee is indulged in trading activities and is a

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 7 - profit-making organization, the total claim of deduction u/s.80P of Rs.39,15,9757- is hereby rejected and added to the total income. Penalty proceedings u/s.271(1)(c) are separately initiated for claiming wrong deduction u/s.80P of the I.T. Act 1961 and thereby furnishing inaccurate particulars of income.

3.2 Appellant's submission:-

The relevant extracts from the submission of the appellant are reproduced here under:- 1. "The learned AO has determined the income of Rs.39,15,976/- as against returned income of Rs.Nil on the ground that the income is derived from the activities which is not eligible for deduction under Section 80P. 2. In this connection, it may please be noted that the AO has failed to appreciate the nature of business and the claim made by the assessee in the computation of income. The learned AO has treated the assessee as Primary Agricultural Credit Society [PACS] and Primary Co.op. Agricultural and Rural Development Bank [PCARDB]. Similarly, the assessee has discussed in the assessment order that the assessee is a Co.op. Credit Society. The learned AO has failed to appreciate the nature of business. The assessee submitted the reply to show-cause notice by letter dated 06/01/2014 reproduced in the assessment order on Page No.5 explaining the nature of business and the nature of deductions claimed. 3. The assessee is a sales and purchases union. It makes the products both agriculture and non-agriculture and also to the members and non-members. The income is taxable. The income as per written of income is Rs.39,15,976. Thereafter the assessee has claimed deduction under Section 80P as stated in the notes to the statement of income. The assessee has claimed the deduction under Sections 80P(2)(c) i.e. basic deduction 80P(2)(e) i.e. godown rent, 80P(2)(d) i.e. dividend and interest & 80P(2)(iv) i.e. agriculture commission income. After deduction eventually the income is Rs. Nil. 4. The learned AO has completely misappreciated the facts and the learned AO ignored the deduction claimed as if the assessee is a

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 8 - co.op. credit society. This is erroneous. Your honour is therefore prayed to allow the deduction under Section 80P as claimed. 5. It may please further be noted that the AO has allowed the deduction as claimed by the assessee in the past since many years. The copy of assessment order and statement of income for A.Y. 2009-2010 and AY. 2010-2011 are enclosed to show that the deduction as claimed is allowed. Therefore, the AO should follow the policy consistently and that the deduction should have been allowed. Your honour is therefore prayed to allow the appeal.

The appellant has given further submission in addition to its earlier submission in support of its appeal.

"With reference to above and in continuation of our written submission dated 12-09-2014, we further beg to state as under: 1. The assessee is a sales and purchases union. It markets the products both agriculture and non-agriculture and also to the members and non- members. The income is taxable. The income as per written of income is Rs.39,15,976. Thereafter the assessee has claimed deduction under Section 80P as stated in the notes to the statement of income. The assessee has claimed the deduction under Sections 80P(2)(c) i.e. basic deduction, 80P(2)(e) i.e. godown rent, 80P(2)(d) i.e. dividend and interest & 80P(2)(iv) i.e. agriculture commission income. After deduction eventually the income is Rs. Nil. 2. In the course of hearing, your honour asked to furnish the note on the rent of Rs.24,59,880/-. In this connection, it may please be noted that the assessee has let out the godown for the purpose of marketing the commodities. Some of the main tenants are given below with the purpose specified against his name.

Sr. Name of party to whom Purpose No. the godown is let out 01. KRIBHCO For marketing the fertilizers and seeds 02. Gujarat Sate Seeds For marketing seeds Corporation Ltd. 03. Krushi Care For marketing organic fertilizers

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 9 - 04. Benani Cement For marketing cement for agriculture purpose 05. IFFCO For marketing the fertilizers 06. Asian Tradelink For marketing cattle feed 07. Mahakali Corporation For marketing cattle feed 08. Vinayak Corporation For marketing cattle feed 09. Ambica Trading Co. For marketing cattle feed

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 10 - 7. We enclose herewith Balance Sheet and Profit & Loss Account for A.Y. 2011-2012 in English as desired."

The appellant has given further submission in addition to its earlier submission in support of its appeal.

“With reference to above and in circumstances of our written submission dated 12/09/2014 & 11/12/2014, we further beg to state as under: 1. We submit herewith the breakup of godown rent as desired by your honour as under:

Sr Name of party to Purpose Amount No. whom the Rs. godown is let out 1 KRIBHCO For marketing the fertilizers and 4,91,700 seeds 2 Gujarat Sate For marketing seeds 2,35,000 Seeds Corporation Ltd. 3 Krushi Care For marketing organic fertilizers 1,31,200 4 Benani Cement For marketing cement for 3,36,000 agriculture purpose 5 IFFCO For marketing the fertilizers 18,480 6 Asian Tradelink For marketing cattle feed 1,80,000 7 Mahakali For marketing cattle feed 2,94,000 Corporation 8 Vinayak For marketing cattle feed 2,94,000 Corporation 9 Ambica Trading For marketing cattle feed 1,47,000 Co.

10 Dena Gramin For providing training to the 2,76,000 Training Centre farmers 11 Hari Traders For marketing cattle feed 48,000 12 Subhashbhai For marketing seeds 1,200 Gangaram Inva

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 11 - 13 Gajeshwari For repairing tractor used for 4,800 Garage agricultural purposes 14 Jay Shakti For marketing seeds 1,100 15 Rajubhai For marketing cattle feed 1,400 Haribhai Sharma Total: 24,59,880

1.2 From the above, it may please be seen that the godown are let for marketing the commodities used for agricultural purposes and therefore the assessee is entitled to deduction under Section 80P(2)(e). 2. As regards commission, it is connection with sales of fertilizer to the member societies. Section 80P(2)(iv) is applicable to the purchase of other commodities intended for agriculture for the purpose of supplying them to the members. Now whether the assessee purchases and supplies or supplies and earns commission. It is one and the same and therefore the agricultural commission received from Gujarat Marketing Federation is eligible for deduction under Section 80P(2)(iv) as reduced by the estimated expenses. The kind attention is drawn to the SC decision in the case of assessee himself Sabarkantha Zilla Kharid Vechan Sangh Ltd. V/s. CIT 203 ITR 1027. The catch-notes are reproduced for ready reference:

"Co. op. society - society engaged in purchase of agricultural implements, seeds, livestock etc. intended for supply to members - deduction from income tax- society carrying on taxable activities also - deduction from tax available only in relation to net profits and not gross profits -deduction at average rate on amount on which no tax is payable".

Accordingly the assesses has deducted the expenses on estimated basis which is accepted by the AQ in the past. It is hoped that the explanation offered will be satisfactory."

2.2 Finally assessee claimed u/s.80P(2) of the I.T. Act was disallowed and income of Rs.39,15,976/- was assessed.

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 12 - 3. Against the said order, assessee preferred first statutory appeal before the learned CIT(A), who partly allowed the appeal of the assessee.

5.2 In our opinion, Ground No.1 is not sustainable and dismissed this Ground of department.

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 13 - Society from the letting of godowns or warehouse for storage, processing or facilitating the marketing of commodities shall be fully entitled for deduction. Since, the appellant satisfies the conditions that claim for deduction is justified.

6.2 In our considered opinion, assessee claim for Rs.23,54,433/- u/s.80P(2)(e) is allowed. In the result, this Ground of the department is dismissed.

7.2 In our considered opinion, this Ground of department is dismissed.

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 14 - reducing, the estimated expenses of Rs.2.75 Lacs the assessee has claimed this deduction. It has been explained by the appellant that it was acting as commission agent for Gujarat Estate Co-operative Marketing Federation for marketing inorganic fertilizer. It has earned commission for this activity. The assessee has itself disallowed certain expenses on estimated basis for earning such income. A perusal of the details filed by the assessee show that the appellant has earned this income from Gujarat State Co-operative Marketing Federation Ltd. for acting as an agent. The assessee company is acting as the nodal agency for all the smaller agencies at Taluka level. The provisions of the section clearly shows that the deduction is allowable for purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members. The assessee has acted as a marketing agent for supplying the fertilizers to its subsidiary cooperative societies meaning thereby that the product is being marketed to the members. Since, the income has been earned from a specified activities, the deduction claimed by the assessee were rightly allowed by the learned CIT(A). The reliance is also placed on the Supreme Court’s decision in the case of appellant himself Sabarkantha Zilla Kharid Vechan Sangh Ltd. V/s. CIT 203 ITR 1027. It is also noted that the AO has disallowed the estimated expenditure disallowed by the appellant from the activity of commission as it has completely disallowed the claim. The claim made by the assessee was justified as the net profit was rightly allowed as deduction and not the gross income.

ITA No.603/Ahd/2015 The ITO vs. The Sabarkantha Dist. Purchase & Sales Union Ltd. Asst.Year – 2011-12. - 15 -

8.2 In our considered opinion, learned CIT(A) has rightly allowed the agricultural commission to the assessee.

Sd/- Sd/- एन.के. �ब�लैया महावीर �साद (लेखा सद�य) (�या�यक सद�य) ( MAHAVIR PRASAD ) ( N.K. BILLAIYA ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Ahmedabad; Dated 04/10/2017 Priti Yadav, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-2, Ahmedabad. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 25/09/2017 (dictation-pad 6 pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member …04/10/2017 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S…………….. 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S……. 7. Date on which the file goes to the Bench Clerk………………… 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order………………